2018 (2) TMI 2112 - AT - Income Tax

Addition on account of peak of negative cash as undisclosed investments - benefit of telescoping - search and seizure operation took place at the premises of the assessee Group - AO noticed that there is a negative cash balance in the cash book of the assessee - HELD THAT - During the course of search, when negative cash balance was confronted to the assessee, the partner explained that such negative balance was on account of payment made out of unaccounted income and the unaccounted income has been offered as part of overall disclosure. In our considered opinion when the assets were acquired out of undisclosed income and when the entries are made in the books of accounts, it is bound to result in negative cash balance. Hence, the benefit of telescoping of such negative cash balance against disclosure made on application of funds has to be allowed. The revenue cannot make additions on both counts that is on the one hand, the additions of income has been made and on the other hand the assets acquired out of such income is treated as unexplained investment. The revenue cannot blow hot and cold in the same breath. Decided against revenue.

Summary

Issues: Revenue challenging deletion of addition of negative cash as undisclosed investments for A.Y. 2009-10.

Analysis:
1. Issue: Revenue challenged the deletion of addition of Rs. 2,27,86,693/- as undisclosed investments.
- The Revenue disputed the order of the Ld. CIT(A) which deleted the addition.
- The negative cash balance in the cash book was noted during assessment proceedings.
- The AO made the addition as further undisclosed investment.

2. Facts:
- A search and seizure operation revealed a total disclosure of Rs. 786 lacs by the appellant group.
- The AO noticed a negative cash balance of Rs. 2,27,86,693/- in the cash book.
- Assessee explained that undisclosed income was introduced in the business for payments.
- The AO did not accept the explanation and made the addition.

3. Decision:
- The ld. CIT(A) directed the AO to delete the addition after considering the submissions.
- The Revenue appealed, with the DR supporting the AO's findings and the assessee's counsel reiterating their stance.
- The ITAT found that assets were acquired from undisclosed income, resulting in negative cash balance.
- Telescoping of negative cash balance against disclosures made on application of funds was allowed.
- The ITAT dismissed the Revenue's appeal, stating that the revenue cannot make additions on both income and assets acquired from that income.
- The findings of the ld. CIT(A) were upheld, and the appeal by the Revenue was dismissed.

This judgment highlights the principle that assets acquired from undisclosed income leading to a negative cash balance should be considered in totality for tax assessment purposes. The ITAT emphasized the importance of allowing telescoping of negative cash balance against disclosed income to prevent double taxation. The decision provides clarity on the treatment of undisclosed investments and the utilization of undisclosed income in regular business operations.